Author Archives: consumerfinancewatchblog

House Passes Mortgage Choice Act Proposing Amendment to Qualified Mortgage Rule

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By:      Michael Meehan

On June 9, 2014, the United States House of Representatives passed the Mortgage Choice Act of 2014, which, among other things, revises the definition of “points and fees” under the Truth in Lending Act’s qualified mortgage rule to exempt both affiliated and unaffiliated title fees.

Under the Dodd-Frank Act, a qualified mortgage may not have points and fees that exceed three percent (3%) of the loan amount. “Points and fees” is a defined term in the statute, which currently encompasses fees paid to affiliated title companies (those companies with which the lender has an affiliated business arrangement) but not unaffiliated title companies. According to the Act’s proponents, Representatives Bill Huizenga (R-Mich) and Gregory Meeks (D-NY), the current definition precludes many affiliated loans from meeting the qualified mortgage rule’s points and fees threshold, further restricting consumer access to mortgage credit, or at a minimum, increasing the cost of such credit. The Act amends the definition under the rule to also exclude affiliated title fees, which its proponents believe will result in a greater number of qualified mortgage loans and expanded credit opportunities for low and moderate income homebuyers.

The Act has been widely supported by financial services and housing trades, including the Mortgage Bankers Association, National Association of Federal Credit Unions, National Association of Home Builders, and the National Association of Realtors. However, opponents of the Act, such as the Center for Responsible Lending and Consumer Federation of America, worry that the amendment will allow lenders to charge excessive title fees to affiliated entities while remaining within the protections that the qualified mortgage rule affords.

The Act passed the House by unanimous vote and awaits a determination in the Senate. If passed, the Act instructs the Consumer Financial Protection Bureau to finalize regulations implementing the new definition within 90 days.

 

Special Considerations Required to Protect Lienholder Interests in Ohio Expedited Foreclosure Matters

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By: Chrissy M. Dunn

Recently, there has been an uptick in demolitions of dilapidated and abandoned residential properties in Ohio, which are primarily acquired by community land banks through expedited tax foreclosure matters.  Lienholders should be aware of special considerations needed to protect their interests in expedited tax foreclosure matters authorized by Ohio law.

Summary of the Ohio Expedited Foreclosure Statute

Ohio Revised Code Sections 323.65 to 323.79 (“Ohio Expedited Tax Foreclosure Statute”) allow counties to expeditiously prosecute tax foreclosure actions against abandoned or vacant properties.  Expedited foreclosure proceedings are intended to help communities recover from the foreclosure crisis by facilitating the return of vacant, abandoned, and tax foreclosed properties to productive economic use, more quickly than they would be in traditional tax foreclosure actions through direct transfer to a county land bank without a foreclosure sale. The statutory procedure allows for quick disposal of abandoned properties which are dilapidated, run down, neglected, environmentally hazardous, and/or dangerous, by turning them over to a political subdivision, land reutilization corporation, school district, or eligible community development organization for demolition or rehabilitation purposes. Donations of these properties to land reutilization corporations, known as community land banks, appear to be on the rise in Ohio.  

Banks and HOAs may actually favor these expedited procedures, as shorter timelines free up the backlog of court cases and help resell homes more quickly. Nonetheless, due to the quick pace in these cases, it is especially important that lienholders served with a Complaint in an expedited tax foreclosure act promptly to protect their interests.

Expedited foreclosure actions may be prosecuted in civil courts or the Ohio “Board of Revision” (“BOR”). To qualify as an expedited foreclosure case under the statute, the subject property must be abandoned, unoccupied, and certified as tax delinquent for a year or more.  If even one of these requirements is not met, the BOR loses jurisdiction over the case, and the Ohio Expedited Tax Foreclosure Statute does not apply.    

The Ohio Expedited Tax Foreclosure Statute provides that if “Impositions” (delinquent taxes, assessments, penalties, interest, costs, reasonable attorney’s fees of a certificate holder, applicable and permissible costs of the prosecuting attorney of a county, and other permissible charges against abandoned land) exceed the auditor’s assessed value of the property in an expedited foreclosure proceeding, it may be transferred without a foreclosure sale.  The statute on its face appears to require that a property be taken to foreclosure sale after the entry of a decree of foreclosure, only if the Impositions do not exceed the auditor’s assessed value of the property; however, some Ohio prosecutors take the position that O.R.C. § 323.78 allows the BOR to transfer any abandoned, qualifying property directly to an applicable community organization, without a sale.

Responding to an Expedited Tax Foreclosure Matter

The easiest resolution for a case in which the lienholder believes the property has equity and wants to prevent the immediate transfer of the property without a sale, is to pay the taxes for the parcel to have the case dismissed, so that a lienholder may file its own foreclosure. This will not likely be a desirable option in most expedited foreclosure matters (due to the jurisdictional requirements in these cases, they are likely blighted properties).

O.R.C. § 323.72(A)(2) provides that at any time before confirmation of sale or transfer of abandoned land or before the expiration of the alternative redemption period, a lienholder or another person having a security interest of record in the abandoned land may plead that in order to preserve the lienholder’s or other person’s security interest of record in the land, the complaint should be dismissed and the abandoned land should be removed from the abandoned land list and not disposed of as provided in sections 323.65 to 323.79 of the Ohio Expedited Tax Foreclosure Statute. The BOR may approve such a request without a hearing.  

If the board approves the request without a hearing, the board shall file the decision with the clerk of court, and the clerk shall send a notice of the decision to the lienholder or other person by ordinary mail.

BOR Hearings

If a lienholder does not wish to pay the taxes in an expedited foreclosure action, it may answer the complaint and seek that the property be taken to a sheriff’s sale. A lienholder may file with the county BOR a good faith appraisal of the parcel from a licensed professional appraiser, and request a hearing to determine whether the Impositions against the parcel of abandoned land exceed or do not exceed the fair market value of that parcel as shown by the auditor’s then-current valuation of that parcel. The lienholder may present evidence of the property value at the hearing. The request for this hearing must be filed not later than seven days before a final hearing on a complaint.  

The only questions to be considered at the hearing are the amount and validity of all or a portion of the Impositions, whether those Impositions have in fact been paid in full, and, under division (A)(1) of the section, whether valid issues pertaining to service of process and the parcel’s status as abandoned land have been raised. 

At the hearing, the BOR shall make a factual finding as to whether the Impositions against the parcel exceed or do not exceed the fair market value of that parcel as shown by the auditor’s then-current valuation of that parcel.  An owner or lienholder must show by a preponderance of the evidence that the Impositions against the parcel do not exceed the auditor’s then-current valuation of the parcel in order to preclude direct transfer without a sale. 

The auditor’s valuation may serve as evidence of the property value, but may be rebutted.

At the conclusion of the final hearing at which a final decree of foreclosure is entered in an expedited foreclosure proceeding, the property may be transferred without a sheriff’s sale unless the Impositions are paid within 45-days of journalization of the entry of final foreclosure.  After the 45-day redemption period expires, the right and equity of redemption of any owner or party terminates without further order of the court or BOR.  

Lienholders should keep these considerations in mind if a property has equity which the lienholder would like to protect, and should retain counsel quickly to protect their interests.

Eleventh Circuit Defines “Called Party” for Purposes of the TCPA

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By: Manuel S. Hiraldo

In recent opinions, the United States Court of Appeal for the Eleventh Circuit addressed an issue of first impression in Osorio v. State Farm Bank, F.S.B., 746 F.3d 1242 (11th Cir. 2014) (issued on March 28, 2014) and Breslow v. Wells Fargo Bank, N.A., Case No. 1:11-cv-22681 (11th Cir. 2014) (issued on June 9, 2014). In both cases, the Eleventh Circuit held that the term “called party” as used in the Telephone Consumer Protection Act, 47 U.S.C. § 227, refers to the subscriber of a cellular telephone number, and not the individual whom the caller intended to call. Prior to these opinions, the only federal appellate court that had ruled on the issue was the Seventh Circuit. See Soppet v. Enhanced Recovery Co., LLC, 679 F.3d 637, 640 (7th Cir. 2012). In Osorio and Breslow, the Eleventh Circuit followed the Seventh Circuit’s reasoning that the TCPA consistently uses the term “called party” to mean the subscriber of the telephone number.

In part, the TCPA makes it unlawful for any person

(A) to make any call…using any automatic telephone dialing system or an artificial or prerecorded voice—
. . .
(iii) to any telephone number assigned to a paging service, cellular telephone service, specialized mobile radio service, or other radio common carrier service, or any service for which the called party is charged for the call . . . .

47 U.S.C. § 227(b)(1) (emphasis supplied).

In Osorio, Clara Betancourt provided the cellular telephone number of Fredy Osorio in connection with auto insurance and credit card applications. 746 F.3d at 1242. Betancourt subsequently defaulted on her credit card payments, which caused State Farm to attempt to contact her on the cell number provided by Betancourt. Osorio, the subscriber of the number provided by Betancourt to State Farm, sued State Farm for violating the TCPA as a result of State Farm’s use of an autodialer to contact Osorio’s cellular telephone without his consent. On summary judgment, State Farm argued that the “called party” should be interpreted to be the “intended recipient” (Betancourt) under the TCPA. “This would mean that Betancourt, as the intended recipient of State Farm’s calls, could consent to Osorio receiving the calls…” Id. at 1250. In rejecting Wells Fargo’s argument, the Eleventh Circuit held that the “called party” referred to under section 227(b)(1)(A) is not the “intended recipient.” Id.

In Breslow, Wells Fargo made calls to a cellular phone assigned to Lynn Breslow using an autodialer. Case No. 1:11-cv-22681. Breslow did not consent to Wells Fargo’s calls and she sued for alleged violations of the TCPA. Wells Fargo believed it was contacting a customer who had previously provided the number as contact number. In an affidavit filed in support of a motion for summary judgment, Wells Fargo stated that it “was unaware that the cell phone number was no longer assigned to the former customer and that the former customer never revoked his consent. . . .” Wells Fargo argued that the intended recipient of the calls (the former customer) was the “called party,” and it had therefore not violated the TCPA, because it had consent from the former customer. In rejecting this argument, and consistent with its ruling in Osorio, the Eleventh Circuit held that the “called party” for purposes of the TCPA “means the subscriber to the cell phone service.”

In all, these cases are consistent with prior interpretations of the TCPA by the Eleventh Circuit as a strict-liability statute that imposes a $500.00 per call penalty for violations, and places the burden on callers to ensure that they do not violate the TCPA. Financial institutions that utilize autodialers to contact their customers should be aware of these recent cases and this developing area of the law. Pursuant to Osorio and Breslow, an error attributable to the customer may not be a defense.

Supreme Court of Texas Holds Modified Home Equity Loans Not Subject to “80% Rule”

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By:   Joshua A. Huber

In 1997, Texas became the last state in the nation to permit home equity loans. Because of Texas’ strong, historic protection of the homestead, home equity loans are regulated, not by statute as one might suppose, but by the “elaborate, detailed provisions” of Article XVI, Section 50 of the Texas Constitution.[1]  As previously noted in this blog, the Texas Constitution “prescribe[s] a Draconian consequence of noncompliance, whether intentional or inadvertent: not merely the loss of the right of forced sale of the homestead, but forfeiture of all principal and interest.”[2]  One of the detailed provisions, colloquially known as the “80% Rule,” provides that a loan-to-value ratio cannot exceed 80%.[3]

In Sims v. Carrington Mortg. Servs., LLC, 57 Tex. Sup. J. 588, 2014 Tex. LEXIS 396 (Tex. 2014), the Supreme Court of Texas addressed the following question certified by the Fifth Circuit:  “After an initial extension of credit, if a home equity lender enters into a new agreement with the borrower that capitalizes past-due interest, fees, property taxes, or insurance premiums into the principal of the loan but neither satisfies nor replaces the original note, is the transaction a modification or a refinance for purposes of Section 50 of Article XVI of the Texas Constitution?”[4]

The Sims obtained a home equity loan from Carrington Mortgage in 2003 and there was no dispute that the loan, when originated, satisfied the requirements of § 50(a)(6). After falling behind on their payments the Sims were given a loan modification in 2009, and again in 2011.[5]  Each time, past-due payments, interest and other charges, including fees and unpaid property taxes and insurance premiums, were capitalized into the modified loan, resulting in a higher principal balance. The Sims, personifying the maxim “no good deed goes unpunished,” commenced a class action against Carrington four months after the 2011 modification. The Sims alleged, among other things, that the modified balance of their home equity loan exceeded 80% of the value of their property, and that the loan was therefore void pursuant to the Texas Constitution’s 80% Rule.

The Sims argued that the modification was, in fact, a refinance or new extension of credit because the lender advanced new funds to cover past due amounts. Carrington contended that the modification did not satisfy or replace the original loan, and that the amounts capitalized were all part of and due under the terms of the original loan agreement.  In siding with Carrington, the Court stated “[t]he test should be whether the secured obligations are those incurred under the terms of the original loan.”[6] Based on this test and the clear language of the Sims’ loan modification agreements, the Court answered the certified question as follows:

“To the first certified question, we answer: the restructuring of a home equity loan that . . . involves capitalization of past-due amounts owed under the terms of the initial loan and a lowering of the interest rate and the amount of installment payments, but does not involve the satisfaction or replacement of the original note, an advancement of new funds, or an increase in the obligations created by the original note, is not a new extension of credit that must meet the requirements of Section 50.”

The Court’s decision is a win for both borrowers and lenders. As noted in the opinion, the approach advanced by the Sims would encourage lenders to foreclose rather than seek alternatives to keep borrowers in their homes. That potential became a reality as many servicers in Texas halted or reduced home equity loan modifications during the pendency of this case. Now that the uncertainty has been lifted, borrowers will likely be afforded more modification options, and lenders can proceed with modifications without fear of invalidating their loans.

[1]     Fin. Comm’n of Tex. v. Norwood, 418 S.W.3d 566, 571 (Tex. 2013); LaSalle Bank Nat’l Ass’n v. White, 246 S.W.3d 616, 618 (Tex. 2007) (per curiam).

[2]     Norwood, 418 S.W.3d at 571.

[3]     Tex. Const art. XVI, §50(a)(6)(B).

[4]     Sims v. Carrington Mortg. Servs., LLC, 538 Fed. Appx. 537, 547 (5th Cir. 2013).

[5]     Id. at *2-3.

[6]     Id. at *17.

CFPB Takes Action on RESPA Disclosure Rules Concerning Affiliated Business Arrangements

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By: Shane Biffar

On May 24, 2014, the CFPB entered a Consent Order with RealtySouth, the largest mortgage brokerage firm in Alabama, which requires the company to pay $500,000 for alleged inadequate disclosures related to its affiliated business arrangements (“ABA Disclosures”).

As a general rule, Section 8(a) of the Real Estate Settlement Procedures Act (“RESPA”) prohibits giving or accepting a “fee, kickback, or thing of value” pursuant to an agreement or understanding to refer business to real estate settlement services for a federally related mortgage loan. However, RESPA Section 8(c)(4) provides a “safe harbor” which permits certain affiliated business arrangements as long as: (1) a disclosure of the existence of the arrangement and a written estimate of the charges generally made by the provider to which the person is referred (ABA Disclosure) is provided, (2) the consumer is not required to use the affiliated business, and (3) the only “thing of value” received from the arrangement is a return on the ownership interest.

In the case of RealtySouth, the company was charged with violating the above RESPA provisions in connection with title insurance and title examination referrals made to its affiliate, TitleSouth Closing Center, which provides real estate closing services. The CFPB found that RealtySouth’s referrals failed to comply with the safe harbor provision for two reasons. First, the CFPB found that the written disclosures contained in RealtySouth’s ABA disclosure forms failed to comply with the ABA Disclosure requirements as set forth in Appendix D of the implementing regulation, 12 CFR 1024. Second, the CFPB found that RealtySouth’s referral process, as evidenced by both the instructions given to its agents and the format of its purchase contracts, violated Section 8(a) of RESPA by giving a “thing of value” in connection with the affiliated business arrangement.

With respect to the written disclosures, RealtySouth’s disclosure form allegedly failed to comply with RESPA because the disclosure language was not set apart, but rather buried in a section of text that also made marketing claims about the company’s prices. RealtySouth apparently immediately changed its ABA disclosure form when advised of the Bureau’s concerns.

Perhaps more significant are the Bureau’s findings regarding RealtySouth’s ABA referral process. The Bureau concluded that RealtySouth’s form purchase contracts violated Section 8(a) of RESPA by giving and receiving a “thing of value” pursuant to an agreement or understanding that RealtySouth refer settlement services to TitleSouth. Specifically, the Bureau noted that RealtySouth’s form purchase contracts either explicitly directed or suggested that title and closing services be conducted by its affiliate, TitleSouth. By referring consumers to TitleSouth in this manner, the Bureau found that RealtySouth “affirmatively influenc[ed] the selection of TitleSouth” which amounts to a prohibited exchange of a “thing of value” under the Section 8(a). This aspect of the decision is significant because the CFPB is interpreting the act of affirmatively influencing the selection of an affiliate to constitute an exchange of a “thing of value” in violation of Section 8(a). The definition of “thing of value” as set forth in the implementing regulation, 12 CFR 1024.14(d), would not necessarily lead to this conclusion.  

In addition to taking issue with RealtySouth’s ABA disclosures and form purchase contracts, the Bureau also found a “pattern and practice” of RealtySouth encouraging its agents, and in certain instances requiring them, to use RealtySouth’s family of mortgage settlement services, in particular, TitleSouth.

In resolution of this matter, the recently entered Consent Order requires RealtySouth to ensure that its disclosures comply with RESPA and ensure that its training materials emphasize that its agents cannot require the use of TitleSouth affiliates. However, based on the Consent Order, the Bureau appears to be taking the position that mortgage brokers should do more than simply provide the required disclosures and “not require the use of the affiliated business.” Indeed, the Bureau appears to be on the lookout for any referral process that may mislead a consumer regarding his right to shop around when pursuing settlement services. With this in mind, it may be prudent for mortgage brokers to ensure that their ABA referral process highlights the consumer’s right to choose and does not undermine or detract from the required RESPA disclosures.

Mortgage Servicer Held to Be in Violation of Servicemembers Civil Relief Act for Attempted Collection of Foreclosure-Related Fees from Servicemember on Active Duty

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By: Sridavi Ganesan
Connect: Sridavi Ganesan

In Brewster v. Sun Trust Mortgage, Inc., 742 F.3d 876 (9th Cir. 2014), decided on February 7, 2014, the Ninth Circuit ruled that a mortgage servicer violated the Servicemembers Civil Relief Act (“SCRA”) (50 U.S.C. app. § 501 et seq.), due to its efforts to collect fees related to a rescinded Notice of Default while the servicemember borrower was on active duty.  The SCRA is intended to postpone or suspend certain civil obligations to enable service members to devote full attention to duty and relieve stress on the family members of those deployed servicemembers.

In Brewster, the plaintiff was a Lieutenant Colonel in the United States Marine Corps reserves, who was called for active duty during three separate periods between 2008 and 2011.  While he was on active duty, the plaintiff failed to make payments on his home mortgage.  This original mortgage servicer, Sun Trust Mortgage, Inc. (“SunTrust”), therefore initiated the foreclosure process and recorded a Notice of Default.  The amount of the default included fees associated with initiating foreclosure.  The Notice of Default was eventually rescinded, but Sun Trust failed to remove the foreclosure fees from the plaintiff’s account.  Nationstar Mortgage LLC (“Nationstar”) subsequently became the new servicer of the loan and attempted to recover the fees from the plaintiff while the plaintiff was away on active duty.  Id. at 877-878.

After the plaintiff filed his action, Nationstar removed the fees from the account.  Id. at 878, fn 2.  Still, the Court found that Nationstar’s attempt to collect on the fees while the plaintiff was on active duty, regardless of whether any fees were even collected, was itself a violation of the SCRA.  The Court’s ruling hinged on its liberal construction of the term “foreclosure,” as found in section 533(c) of the SCRA.  Section 533(c) of the SCRA states in part that: “[a] sale, foreclosure, or seizure of property for a breach of an obligation described in subsection (a) [a mortgage that originated before the servicemember’s military service] shall not be valid if made during, or within one year after, the period of the servicemember’s military service….”  50 U.S.C. app. §533(c).  The court found that, per the language found elsewhere in the statute, the term “foreclosure” included foreclosure proceedings, so that it applied not just to a single act but a process.  Id. at 879.  Further, the Court analyzed section 2924 of the California Civil Code governing California non-judicial foreclosure and found imposition of fees to be integral to the foreclosure process. Id.  Based on these findings, and taking into account the legislative purpose of the SCRA to allow servicemembers to have peace of mind as to affairs at home while on active duty, the court defined “foreclosure” to include fees related foreclosure proceedings.  Id.

Proposed Amendment to 2013 Mortgage Rules May Provide Some Limited Relief to Lenders and Servicers

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By Louis Greenfield

On April 30, 2014, the Consumer Finance Protection Bureau (“CFPB”) issued three minor proposed changes to the mortgage rules, aimed at ensuring access to credit.  One of these proposed changes allows mortgage lenders to refund excess points and fees to borrowers, so that mortgages may remain classified as Qualified Mortgages and allow the lender to retain the protections from liability associated with these mortgages. This proposed change affects what is commonly known as the “Ability-to-Repay” rule under TILA (Regulation Z), and offers certain protections to Qualified Mortgages.

  • To be classified as a Qualified Mortgage, among other things, “the up-front points and fees charged in connection with the mortgage must not exceed 3 percent of the total loan amount, with higher thresholds for various categories of loans below $100,000.”
  • However, because determining the fees and points is often a complex process and involves judgment calls, there can be inadvertent errors.
  • This new proposed change will allow a lender to cure these inadvertent errors up to 120 days after the loan is made by refunding the excess points and fees to the consumer to the extent it exceeds the 3 percent threshold.  In particular, this ability to cure has three pre-requisites
    1. The creditor (or assignee) originated the loan with a good faith intention that the loan constitute a qualified mortgage and otherwise complied with other qualified mortgage pre-requisites, as defined under the regulation.
    2. The creditor (or assignee) must refund the dollar amount by which the points and fees exceed the applicable limit at consummation within 120 days after consummation of the loan; and
    3. The creditor (or assignee) must maintain and follow enumerated policies and procedures within the proposed changes for post-consummation review of loans and for refunding to consumers amounts that exceed the limit.

In short, this appears to be a welcome attempt by the CFPB at a limited safe haven provision for lenders or servicers who inadvertently exceed the 3 percent threshold on up-front points and fees. The CFPB is currently seeking public comment on this proposal.

Supreme Denies Cert in Fourth Circuit Federal Preemption Case

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By Joe Patry

In Jaldin v. ReconTrust Company, N.A., 539 Fed. App. 97 (4th Cir. 2013), the borrowers sued Bank of America, N.A. (“BANA”) and ReconTrust Company, N.A. (“ReconTrust”) relating to foreclosure notices they received.  ReconTrust was named as the trustee on a Virginia Deed of Trust.  Id. at 99.  A Virginia statute, Va. Code Ann. §55-58.1, provides that only companies which are formed under Virginia law or that have their principal place of business in Virginia may be named as trustees on Virginia Deeds of Trust.  Id. at 100.  The borrowers alleged that ReconTrust violated Virginia law when it was named as the trustee on their Deed of Trust.  Id.  Although a foreclosure has not yet occurred on their property, they sought damages for foreclosure notices they received and sought to invalid ReconTrust’s appointment as a trustee.  Id. at 99.

On an issue of first impression, BANA and ReconTrust argued that the Virginia statute is preempted under the National Banking Act, because it interfered with their powers to act as national banks.  Id.  at 100.  They also argued that the statue violated the National Banking Act, because Virginia treats Virginia-based banks differently from National Banks – i.e., a Virginia-based bank may be named as a trustee on a Virginia Deed of Trust but a national bank may not.  Id. at   The trial court dismissed the case and found that the federal statute was preempted.  Id. at 102.

The United States Court of Appeals for the Fourth Circuit affirmed, and found that the Virginia statute substantially interfered with the power of federal banks to engage in mortgage lending and foreclose, because it prevented ReconTrust from being named as a trustee in Virginia.  Id. at 101.  Because the Virginia statute conflicted with federal law, it was preempted.  Id. at 102.  Further, the Fourth Circuit noted that the Virginia statute conflicts with the National Banking Act, which prohibits states from treating state-based banks differently from national banks, to prevent states from giving local banks a competitive advantage.  Id.

Subsequently, the borrowers filed a certiorari petition with the United States Supreme Court, which denied certiorari in an order issued May 19, 2014.  Although, of course, the denial of a certiorari petition does not have precedential value and merely lets the lower court decision stand, this decision has the practical impact of removing potential uncertainty over actions taken by national banks which are appointed as trustees on Virginia Deeds of Trust.

Seventh Circuit FDCPA Ruling May Foreshadow CFPB Rule on Time-Barred Debts

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By Michael Meehan

The Seventh Circuit Court of Appeals recently issued a consolidated opinion, McMahon v. LVNV, 744 F.3d 1010 (7th Cir. 2014), involving time-barred debts under the Fair Debt Collection Practices Act (FDCPA). The opinion addressed two cases on appeal, McMahon v. LVNV, 2012 U.S. Dist. LEXIS 92655 (N.D. Ill., July 5, 2012), and Delgado v. Capital Management Services, 2013 U.S. Dist. LEXIS 40796 (C.D. Ill. March 22, 2013). Each case involved a communication from a debt collector that contained a limited-time offer to settle a time-barred debt. In each case, the plaintiff contended that the letter constituted a “false, deceptive or misleading representation” by the debt collector because an unsophisticated consumer could be led to believe the time-barred debt was enforceable in court.

Although an issue of first impression in the Seventh Circuit, this issue had been heard previously by the Third and Eighth Circuits, with each court holding that, absent litigation or a threat of litigation, such a dunning letter would not violate the FDCPA. See Huertas v. Galaxy Asset Mgmt., 641 F.3d 28, 33 (3d. Cir. 2011); Freyermuth v. Credit Bureau Servs., Inc., 248 F.3d 767, 771 (8th Cir. 2001). However, the Seventh Circuit expressly disagreed with the Third and Eighth Circuits, holding that actual or threatened litigation is not necessary to state a valid claim on this fact pattern. The court reasoned that the FDCPA prohibits false representation of the “character, amount or legal status” of the debt (§ 1692e(2)A)) and prohibits a debt collector from threatening to take any action that cannot legally be taken (§ 1692e(5)). Under this standard, an unsophisticated consumer could believe that a letter offering to settle a debt implies that the debt is legally enforceable. Thus, such a communication from a debt collector could mislead an unsophisticated consumer into believing that the debt is legally enforceable and could therefore constitute a violation of the FDCPA, regardless of whether the letter actually threatens litigation. Notably, however, the court did not hold that it is automatically improper to seek re-payment of time-barred debts and further hinted that a general disclaimer within the dunning letter could have resolved any issue.

The McMahon decision creates a circuit split that may eventually warrant U.S. Supreme Court review. But equally important to the holding in McMahon was the position taken by the Consumer Financial Protection Bureau (CFPB) and Federal Trade Commission (FTC) in an amicus brief filed with the Seventh Circuit. See Brief of Amici Curiae Federal Trade Commission and Consumer Financial Protection Bureau Supporting Affirmance, No 13-2030, Seventh Circuit. In the brief, the CFPB takes the position that actual or threatened litigation is not necessary to demonstrate a potential FDCPA violation, and asserts that, while attempting to collect a time-barred debt does not, per se, violate the FDCPA, in many circumstances a debt collector must disclose that the collector cannot sue to collect the debt and must inform a consumer that providing a partial payment would revive the collector’s ability to sue to collect the balance. The Seventh Circuit gave considerable weight to the amicus brief, calling it a “well-reasoned position” and stating that it was inclined to rely upon the agencies’ “empirical research and expertise.”

Foreshadowing of New FDCPA Rule?

The CFPB has taken an unwavering position on the time-barred debts issue, and in March 2014, it filed an additional amicus brief on this same issue in a Sixth Circuit case, Buchanon v. Northland Group, Inc. See Brief of Amici Curiae Federal Trade Commission and Consumer Financial Protection Bureau Supporting Reversal, No 13-2523, Sixth Circuit. The Bureau is currently reviewing the federal rules and regulations governing debt collection, consistent with its authority under Dodd-Frank, and comments to its November 2013 advanced notice of proposed rulemaking (ANPR) closed in February 2014. The ANPR strongly hints that the CFPB is considering some form of required disclosure from a debt collector to a consumer when collecting on a debt that is time-barred, although the nature and scope of such disclosure is unclear. The CFPB’s position in the amicus briefs could foreshadow a future standard regarding time-barred debts under the FDCPA, and it is likely the CFPB’s position will find its way into an NPR expected to be issued in the coming months.

Impact on Loan Servicers

It is well-established that mortgage servicers are not considered debt collectors under the FDCPA, unless the loan being serviced was in default at the time the mortgage servicer acquired servicing rights. See 15 U.S.C. § 1692a(6)(f)(ii)-(iii). However, in the aftermath of the credit crisis, and in a climate where the servicing rights of delinquent loans are regularly transferred, FDCPA compliance is an increasingly important issue for mortgage servicers. When a servicer acquires servicing rights of a delinquent loan, its communications with a consumer relating to that loan are governed by the FDCPA and its promulgating regulations. Servicers acquiring a new portfolio of loans often need to contend with statute of limitations issues relating to delinquent loans, particularly as we move further from the heart of the credit crisis.

While mortgage servicers await the NPR, they should take note of the CFPB’s position in McMahon and Buchanan and the potential direction of FDCPA regulation in this area. Mortgage servicers should examine their FDCPA protocols and methods of communication with consumers to ensure compliance with this new interpretation and the potential new standard under the FDCPA.

Bank of America v. Kuchta Case Pending in Ohio Supreme Court May Clarify Foreclosure Standing Issues

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By Michael Hurley

As of March 2014, there were 1,159,905 U.S. properties in some stage of foreclosure, which represents a 23% year-on-year decline from 2013.[1] Despite the fact that the reverberations of the financial crisis of 2008, which resulted in the collapse of the mortgage-backed securities market, appear to be ebbing, courts across the nation continue to struggle with adjudicating borrowers’ and lenders’ rights. The courts’ asymmetric approach to analyzing the intersection between Article 3 of Uniform Commercial Code (“UCC”), which governs negotiable instruments (promissory notes), and Article 9 of the UCC, which governs secured transactions (mortgages), has resulted in myriad, conflicting case law on the issue of a party’s standing to foreclose. Notably, this issue primarily arises in judicial foreclosure states that require commencement of a formal action to enforce the instruments.

At the heart of courts’ consternation is a question: What rights in the note and mortgage must a party possess in order to have standing prosecute a case to enforce both documents? To answer this question, some background on the UCC is necessary. The mortgage gives the note’s holder a security interest in the collateral – here the real property – in order to ensure repayment of the debt – here evidenced by the promissory note. UCC Article 3 and Article 9 have been adopted, almost uniformly, across the United States.   In 2011, the UCC Commissioners issued a report on the interaction between the two articles in an effort to harmonize their interpretation.[2] Nevertheless, the process of enforcing a mortgage note remains a creature of state law, which varies drastically across the nation. Ohio courts, in particular, have struggled with the issue of standing. Their published decisions provide insight into the dialectical debate ongoing on a national scale.

On October 31, 2012, the Supreme Court of Ohio issued its decision in Federal Home Loan Mortgage Corp. v. Schwartzwald, 134 Ohio St.3d 13, 2012-Ohio-5017.[3] The appellate conflict issue raised was whether, in a mortgage foreclosure action, a party must have standing at the time the suit is filed, or whether the lack of standing can be cured so long as it is done so prior to judgment. For our purposes, the key wording is found in paragraph 28 of the opinion: because [the plaintiff] failed to establish an interest in the note or mortgage at the time it filed suit, it had no standing to invoke the jurisdiction of the common pleas court. (Emphasis added.)[4] This clause has been the central focus of dozens of appellate decisions.

The First, Second, Fifth, Sixth, Seventh, Eighth, Tenth, Eleventh, and Twelfth Districts of Ohio have all found that the plain language of Schwartzwald requires a plaintiff to establish an interest in the note or mortgage at the time the suit is filed.[5] The Fourth District has adopted this position in dicta.[6] The Ninth District remains the lone holdout in requiring that a party must establish an interest in the note and mortgage at the time the suit is filed.[7] The Third District has yet to take a clear stance on the issue.[8]

While the debate regarding standing has likely resulted in millions of dollars in legal fees and has been the subject of many blog discussions, this post included, Ohio courts could have circumvented the issue by concentrating on the primary document at hand – the promissory note. As explained in the UCC Editorial Board’s 2011 analysis, the “and/or” debate going on in Ohio and across the nation is largely moot. UCC Section 9-203(g) provides that the transfer of the interest in the note automatically transfers a corresponding interest in the mortgage. While Ohio courts have acknowledged this concept,[9] they have thus far failed to marry it with Schwartzwald’s standing analysis. When this issue comes up on appeal to the Ohio Supreme Court, one hopes the Court it will correctly interpret the UCC to clarify the status of the law.

Perhaps it will take the opportunity to clarify Schwartzwald’s standing analysis when it issues its decision in Bank of America, N.A. v. Kuchta, Case No. 2013-0304, for which oral arguments were held January 8, 2014.[10] The issue in Kuchta is: When a defendant fails to appeal from a trial court’s judgment in a foreclosure action, can a lack of standing be raised as part of a motion for relief from judgment? A decision that clarifies Schwartzwald, when read in conjunction with the voluminous case law undergirding the debate, should inform other jurisdictions struggling with the standing issue.

[1] RealtyTrac, U.S. Real Estate Statistics and Foreclosure Trends, (April 2014) , available at http://www.realtytrac.com/statsandtrends/foreclosuretrends.

[2] Report of the Permanent Editorial Board for the Uniform Commercial Code, Application of the Uniform Commercial Code to Selected Issues Relating to Mortgage Notes, American Law Institute (Nov. 14, 2011), available at http://www.uniformlaws.org/Shared/Committees_Materials/PEBUCC/PEB_Report_111411.pdf.

[3] Available at http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2012/2012-ohio-5017.pdf

[4] Notably, some states, e.g. Oregon, Idaho, Minnesota, Montana, Wyoming, require that a mortgage assignment be recorded before a foreclosure can occur.

[5] SBC Bank USA v. Sherman, 1st Dist. C-120302, 2013-Ohio-4220, ¶ 15; Bank of New York Mellon Trust Co. v. Herres, 2d. Dist. No. 25890, 2014-Ohio-1539, ¶ 24; Federal Home Loan Mtge. Corp. v. Rufo, 983 N.E.2d 406, 2012-Ohio-5930, ¶ 30 (Ohio App. 11 Dist. 2012); Bank of New York Mellon v. Matthews, 6th Dist. No. F-12-008, 2013-Ohio-1707, ¶ 11; CitiMortgage, Inc. v. Loncar, 7th Dist. No. 11 MA 174, 2013-Ohio-2959, ¶ 15; CitiMortgage, Inc. v. Patterson, 8th Dist. No. 98360, 2012-Ohio-5894, ¶ 21; U.S. Bank Natl. Assn. v. Gray, 10th Dist. No. 12AP-953, 2013-Ohio-3340, ¶ 27; Fed. Home Loan Mtg. Corp. v. Koch, 11th Dist. No. 2012-G-3084, 2013-Ohio-4423, ¶ 24; SRMOF 2009-1 Trust v. Lewis, 12th Dist. Nos. CA2012-11-239, 2014-Ohio-71, ¶ 16.

[6] Bank of America, N.A. v. Stewart, 4th Dist. No. 13 MA 48, 2014-Ohio-723, ¶ 32.

[7] BAC Home Loan Serv. v. McFerren, 9th Dist. Summit No. 26384, 2013-Ohio-3228, ¶ 13 (holding “that Schwartzwald did not overturn long-standing property and foreclosure principles and, therefore, [the plaintiff] had to be holder of the Note and the Mortgage at the time it initiated this action order to have standing”).

[8] Everbank v. Vanarnhem, 3d. Dist. 14-13-022013-Ohio-3872, ¶ 34, ftnte. 2 (“Because Everbank was a holder of the promissory note and had legal title to the mortgage in this case, we need not address the issues of whether legal title to the mortgage alone is sufficient for standing and whether the assignment of the mortgage also assigned the right to enforce the promissory note.”)

[9] See, e.g., Bank of New York Mellon v. Loudermilk, 5th Dist. Fairfield No. 2012-CA-30, 2013-Ohio-2296, ¶43 (citing cases); Deutsche Bank Natl Trust Co. v. Najar, 8th Dist. Cuyahoga No. 98502, 2013-Ohio-1657, ¶65 (“Even if the assignment of mortgage from Argent to Deutsche Bank was invalid, Deutsche Bank would still be entitled to enforce the mortgage because under Ohio law, the mortgage ‘follows the note’ it secures. * * * The physical transfer of the note endorsed in blank, which the mortgage secures, constitutes an equitable assignment of the mortgage, regardless of whether the mortgage is actually (or validly) assigned or delivered.”); Gray, at ¶31-34 (recognizing that the transfer of a note automatically results in equitable assignment of a mortgage securing the note).

[10] Briefs available at http://www.supremecourt.ohio.gov/Clerk/ecms/resultsbycasenumber.asp?year=2013&number=0304; Oral argument available at http://www.ohiochannel.org/MediaLibrary/Media.aspx?fileId=141925.